The UAE’s introduction of a federal corporate tax regime will have significant impact, bringing its tax system in line with international best practices and further reducing its dependence on oil revenue, while keeping the country competitive.
The second-largest Arab economy has in recent years introduced major tax changes such as the implementation of value added tax (VAT) in 2018, which helped it align with international markets and bolstered public finances.
The introduction of a federal corporate tax of 9 percent on business profit from June 2023 will have far-reaching implications for companies and individuals with business activities in the country, although some sector and free-zone exemptions will apply.
The new corporate tax will apply for financial years starting on or after June 1, 2023. This means that any company whose fiscal year starts on June 1, 2023 should expect to file its first tax return towards the end of 2024.
Firms operating on a calendar-year basis will be subject to corporate tax starting on Jan. 1, 2024 with the filing likely due towards mid-2025, which provides a generous period to prepare for the change. 1
The federal tax system is applicable to all businesses and commercial activities operating within the country’s seven emirates, with several exceptions.
For example, businesses operating in the extraction of natural resources, predominantly upstream oil and gas companies, will continue to be subject to the tax decrees issued by the respective emirate, rather than to the new corporate tax.
Charities and other public benefit organisations will also be exempt, provided that an exemption application is made to the finance ministry and approved by the cabinet.
Another exemption will apply to wholly government-owned UAE companies that carry out specified activities, provided that they are approved by the cabinet.
Public and regulated private social security and retirement pension funds; and investment funds that are organised as flow-through limited partnerships are also exempt.
Regulated investment funds and real estate investment trusts (REITs) can apply for exemption if they meet certain requirements, according to PwC.
The corporate tax will also not be levied on individuals earning income on a personal capacity, such as salary or investment income, as long as the income-generating activity does not require a commercial license.
Another exemption applies to businesses registered in the country’s many Free Trade Zones, provided they comply with all the regulatory requirements and do not conduct business with mainland UAE.
Dividend income earned by a UAE-based company from qualifying shareholdings, capital gains, profits from a group reorganisation and intra-group transactions will be exempt from the corporate tax.
There will also be no UAE withholding tax on domestic and cross-border payments.
In a significant shift, foreign banks, which have been operating under Emirate-level banking tax decrees, will now be subject to the Federal Tax Law, according to KPMG. Local banks, like other businesses, will be subject to the new corporate tax.
Corporate tax rates and rules
The new corporate tax regime introduces a tiered system with three rates.
All annual taxable profits that fall under a threshold of AED375,000 (U.S.$102,087) will be subject to zero rate, while all taxable profits above that threshold will be taxed at 9 percent.
At the same time, all multinational enterprises with a consolidated global revenue over AED3.15 billion (U.S.$857.7 million) will be subject to different rates based on the OECD’s Base Erosion and Profit-Shifting rules.
Accumulated taxable losses will be allowed to offset future taxable profits and taxable entities will be allowed to take the foreign corporate tax paid on UAE taxable income as a credit against annual tax liability.
In line with its commitment to companies registered in Free Trade Zones, the UAE will levy a 0 percent corporate tax rate or award an exemption for periods of up to 50 years with exemptions varying across different free zones provided that such entities do not conduct business with the mainland.
However, all free zone entities will be required to register and file an annual corporate tax return.
Businesses with presence in both the mainland UAE and Free Trade Zones as well as those operating under the dual license scheme should consider the impact on their operating model, KPMG said.
“A number of points remain unanswered such as what constitutes Qualifying Income (subject to Cabinet decision), the treatment of transactions between Free Zone entities and group entities located in mainland UAE, and whether the election to become subject to regular CT (corporate tax) in the UAE is irrevocable,” PwC said in a note. 2
As four of the six Gulf Cooperation Council (GCC) countries already levy corporate taxes at higher rates, the UAE’s move is not likely to have an adverse impact on its attractiveness as a business destination in the region.
Saudi Arabia taxes resident capital companies and non-residents carrying out business activities in the kingdom at 20 percent. Kuwait and Oman apply a 15 percent rate on corporate profits, while Qatar levies a 10 percent tax.
Bahrain limits its 46 percent corporate tax to activities such as exploration, production or refining of hydrocarbons, while all other companies enjoy a 0 percent rate. 3
The new UAE corporate tax rate also remains competitive compared to low-tax hubs in Europe such as Montenegro (9 percent) and Ireland (12.5 percent), according to Marmore, a MENA research company. 4
On average, European OECD countries currently levy a corporate income tax rate of 21.5 percent, slightly below the worldwide average of 23.4 percent in 2022, reports U.S. think tank Tax Foundation. 5
Fiscal boost for UAE government
Repeated oil price declines and the pandemic in 2020, highlighted the importance of diversifying the UAE’s revenue sources.
Revenue generated from the new corporate tax regime could reach around U.S.$13 billion, amounting to up to 15 percent of the government’s total non-oil revenue, according to Marmore’s calculations.
The UAE finance ministry collected AED9 billion (U.S.$2.5 billion) in VAT proceeds in 2022, its top official said. 6
Although this major tax reform will affect a large number of businesses operating across most sectors, it is unlikely to have a negative impact on the UAE’s standing as a competitive business hub. Furthermore, it will help to boost non-oil revenue, stabilising public finances.